From Greece to other “southerners” to the euro zone as a whole: yes, entirely possible but the powers that be will do everything possible to save the single currency.

From risk accepting to risk aversion in under a week! What lies behind the present emergency? Greece, of course, but what more, and where will it lead?

The SEC’s investigations of the behaviour of Wall Street banks reflects a major shift in the US political will and of popular opinion. Financial markets are nonetheless more risk receptive.

Three emergency operations in a row – US subprime, euro debt and UK deficit – apparently controlled for the immediate future. But the longer term still demands action. Some action is appearing.

In the USA rebalancing is now underway, implying establishing the long-term basis for a modest recovery. We lengthened government debt too soon and too much.

After weighing two fundamentally opposing arguments about government borrowing crowding out the private sector, we have come down in favour of longer recommended maturities.

Occasionally an analysis brings you up short and makes you rethink what you thought was obvious. Such is the case in the light of Koo's (Nomura) "balance sheet recession".

This week we raise ten questions yet without clear answers. Together they are disturbing. Readers might think of their own answers, but “status quo” is unlikely to be amongst them.

A period of calm let us reconsider the impact of the end and eventual reversal of quantitative easing. Long-term rates must rise, but what of inflation?

Illiquidity has returned to bond markets. Confidence everywhere is falling. Profligacy has moved from the private to the public sector. Where can it lead?

The bond market went quiet last week because of lost working days. The issue of liquidity may be temporarily resolved, but next week will determine if normality has returned.

If it is not the worsening economy in the USA, it is the Greeks creating mayhem in the Euro zone. Rescue will come, but time to batten down hatches!

The Western government deficits are simply unsustainable. The bond markets may have been tolerant so far, but they will eventually perceive government debt as high risk and demand better returns.

It is a case of economists versus traders. Guess which are optimistic and which pessimistic. Which are right? Just as important, which view is gaining credence?

To help cope with contradictory data and opinion, it is helpful to distinguish the likely development of the swap yield curve from the government bond curve.

Growing disconnect between financial markets and the real Western economy makes us urge great caution, especially regarding the issuance of so many “junk bonds”. Diversifying currencies is to be recommended.

With so much positive sentiment reflecting the assumption of a “normal” recovery, there is reason for caution. Government borrowing needs will increase interest rates in the USA and UK.

Bond Outlook [by bridport & cie, December 16th 2009]

Not since the Argonauts has the challenge of steering between two dangers been so great: for the Fed (inflation vs. recession) and, consequently, for all investors (safety vs. risk).

What a paradox: Bernanke’s exit strategy with its “reverse repo” plan, now under test, seems deliberately designed to discourage bank lending and prolong the period of mediocre growth.

A Chinese-made spanner has been thrown into the rebalancing works with their RMB pegged to the USD. The existing economic situation is untenable, but how will it end?

Cheap money always looks for a home, even a risky one, and that builds bubbles. But where? Can emerging markets without currency manipulation avoid them?

Maybe the end quantitative easing will not lead to inflation, but it will add to the pressure to steepen yield curves as government borrowing moves to financial markets.

Two problems are looming: the end of quantitative easing in the short term and reduction of debt to GDP at government level in the long term. Both look inflationary.

New issues of both the US Treasury and the private sector are moving to longer maturities. They will collide once quantitative easing is stopped, and steepen the yield curve.

Current improvement in corporate earnings and stock and credit markets depend on cheap money, lower wages and higher productivity. Can that last? Is it a way out from the impasse?

Some investors see credit and inflation risk so high that capital protection is their main preoccupation; others see the rewards of low-credit bonds continuing for some months. Who is right?

In revamping the current failed regulatory system in the USA, an HBS professor proposes moving from shareholder to stakeholder capitalism, replacing opportunism for an elite.

There is a way of making good returns in fixed-income – bidding for new corporate issues, but its sustainability is uncertain, to the point where it looks like a mini-bubble.

Can the increase in US wholesale prices mean that the switch from deflation to inflation is nearer than we thought? Profits taking may be the best option for bond investors.